Decoding Variable Compensation Plans: A Practical Guide

Introduction:

This article breaks down the complex world of variable compensation plans, offering a critical analysis of current practices and actionable steps to improve alignment and drive revenue growth. We’ll delve into the key arguments surrounding thresholds, payouts, and the overall impact on revenue leaders, ultimately advocating for a more strategic and equitable approach to compensation in a go-to-market environment.

Main Points & Arguments:

  1. The Current Landscape – Threshold-Based Plans & Their Issues: The video highlights a common problem: variable compensation plans that only kick in after a significant revenue target (often 70%) is achieved. This approach creates a disincentive to close deals early, as reps aren’t rewarded for incremental progress, and can lead to a frustrating experience for revenue leaders.

  2. The Need for Alignment – Base Salary & Executive Compensation: A key argument emphasizes that revenue leaders should receive the same bonus structure as the executive team. This fosters a sense of shared ownership and aligns incentives across the entire organization, ensuring that everyone is working towards the same long-term company goals.

  3. Focusing on Long-Term Value – Beyond Just Bookings: The video powerfully argues that true value creation isn’t solely driven by new bookings. Retention is paramount, and revenue leaders should be rewarded for building and maintaining strong customer relationships – a core focus of the Go-To-Market Consortium.

  4. Threshold Adjustments – A More Gradual Approach: The analysts advocate for a tiered approach to variable compensation, moving beyond a rigid 70% threshold. Suggested models include:

    • 70/30 or 60/40: Starting payouts at a lower percentage (60-70%) with a clear escalation based on achievement.
    • 93% Threshold: A significant boost in payout once 93% of the annual target is achieved, creating a powerful incentive to push beyond the initial goal.
    • Step Function: A progressive payout structure, increasing dramatically at certain milestones (e.g., 97%, 100%)

  5. Uncapped Compensation – Driving Performance: The conversation supports uncapped variable compensation plans, mirroring executive compensation, to encourage high-performance behavior and alignment.

  6. Accelerators & Incentives – Reactive Rewards: The inclusion of accelerators – commission rates that increase on all revenue generated after a certain threshold – is a critical recommendation. This incentivizes reps to maximize their impact, regardless of the specific revenue source.

  7. Re-evaluating Established Practices: The speakers point out that many of the current compensation structures are rooted in outdated practices established by founders and VCS. Recognizing and addressing these ingrained behaviors is crucial for driving change.

Actionable Items for Next Week:

  1. Review Your Current Plan: Analyze your current variable compensation plan. Does it align with the principles discussed – particularly the reliance on a single, high threshold?
  2. Benchmark Against Industry Standards: Research what other companies in your industry are offering for revenue leader compensation. Understanding the market landscape can inform your negotiation strategy.
  3. Start the Conversation: Initiate a discussion with your manager and leadership team about the need for a more flexible and rewarding compensation plan. Focus on the alignment of incentives and the potential for increased revenue growth.
  4. Understand your business metrics: Analyze your business metrics, sales cycles, and customer lifetime value to identify key drivers of revenue growth and align your variable compensation accordingly.

Conclusion:

This video reveals a critical tension in the go-to-market world: overly complex and often demotivating variable compensation plans. By advocating for greater alignment with executive levels, a shift towards tiered payouts, and the strategic use of accelerators, the analysts offer a pathway to a more effective and rewarding system. Implementing these changes – starting with a critical review of your current plan and an open dialogue with your leadership – can unlock significant revenue potential and drive sustainable business growth.